SUBSCRIBE TO TMCnet
TMCnet - World's Largest Communications and Technology Community
 
| More

TMCNet:  UNIVERSAL ELECTRONICS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[November 08, 2012]

UNIVERSAL ELECTRONICS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.

Overview We develop and manufacture a broad line of pre-programmed universal wireless control products, and audio-video accessories that are marketed to enhance home entertainment systems. Our customers operate in the consumer electronics market and include OEMs, subscription broadcasters, international retailers, custom installers, North American retailers, private labels, and companies in the computing industry. We also sell integrated circuits, on which our software and IR code database is embedded, to OEMs that manufacture wireless control devices, cable converters or satellite receivers for resale in their products. We believe that our universal remote control database contains device codes that are capable of controlling virtually all IR controlled TVs, DVD players, cable converters, CD players, audio components and satellite receivers, as well as most other infrared remote controlled devices worldwide.



Beginning in 1986 and continuing today, we have compiled an extensive IR code library that covers over 697,100 individual device functions and over 4,800 individual consumer electronic equipment brand names. Our library is regularly updated with new IR codes used in newly introduced video and audio devices. All such IR codes are captured from the original manufacturer's remote control devices or manufacturer's specifications to ensure the accuracy and integrity of the database. We have also developed patented technologies that provide the capability to easily upgrade the memory of the wireless control device by adding IR codes from the library that were not originally included.

We operate as one business segment. We have 24 international subsidiaries located in Argentina, Cayman Islands, France, Germany, Hong Kong (6), India, Italy, the Netherlands, Singapore, Spain, Brazil, British Virgin Islands (3), People's Republic of China (4) and the United Kingdom.

To recap our results for the nine months ended September 30, 2012: • Our net sales decreased 1.6% from $351.0 million for the nine months ended September 30, 2011 to $345.3 million for the nine months ended September 30, 2012.

• Our operating income during the first nine months of 2012 decreased 9.8% to $18.3 million from $20.3 million during the first nine months of 2011.

Our operating margin percentage decreased from 5.9% in the first nine months of 2011 to 5.2% in the first nine months of 2012. Our gross margin percentage improved from 27.6% during the nine months ended September, 30 2011 to 28.3% during the same period in 2012. This improvement was due primarily to the fact that more units were produced internally versus by third party manufacturers in 2012 compared to 2011. In addition, in the third quarter of 2012 we received a lump sum payment in connection with entering into a long-term, confidential Settlement and License Agreement with Logitech. This lump-sum payment was recognized as revenue in the third quarter of 2012 (see Note 10 of the Notes to the Consolidated Financial Statements). Operating expenses, as a percent of sales, increased from 21.7% in the first nine months of 2011 to 23.1% in the first nine months of 2012 primarily due to increased third party legal fees.

Our strategic business objectives for 2012 include the following: • continue to develop industry-leading technologies and products with attractive gross margins in order to improve profitability; • further penetrate the growing Asian and Latin American subscription broadcasting markets; • acquire new customers in historically strong regions; • increase our share with existing customers; • increase the utilization of Enson's factories by becoming less dependent on third party contract manufacturers; • place more operations, logistics, quality, program management, engineering, sales, and marketing personnel in the Asia region; and • continue to seek acquisitions or strategic partners that complement and strengthen our existing business.

We intend for the following discussion of our financial condition and results of operations to provide information that will assist in understanding our consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our consolidated financial statements.

24-------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for sales returns and doubtful accounts, warranties, inventory valuation, business combination purchase price allocations, our review for impairment of long-lived assets, intangible assets and goodwill, income taxes and stock-based compensation expense. Actual results may differ from these judgments and estimates, and they may be adjusted as more information becomes available. Any adjustment may be significant.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements. We do not believe that there have been any significant changes during the three and nine months ended September 30, 2012 to the items that we disclosed as our critical accounting policies and estimates in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for our fiscal year ended December 31, 2011.

Recent Accounting Pronouncements See Note 1 contained in the "Notes to the Consolidated Financial Statements" for a discussion of new and recently adopted accounting pronouncements.

Results of Operations Our results of operations as a percentage of net sales for the three and nine months ended September 30, 2012 and 2011 were as follows: Three Months Ended September 30, Nine months Ended September 30, 2012 2011 2012 2011 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 70.8 72.3 71.7 72.4 Gross profit 29.2 27.7 28.3 27.6 Research and development expenses 2.8 2.3 3.0 2.6 Selling, general and administrative expenses 18.7 17.7 20.1 19.1 Operating expenses 21.5 20.0 23.1 21.7 Operating income 7.7 7.7 5.2 5.9 Interest income (expense), net (0.0 ) (0.0 ) (0.0 ) (0.1 ) Other income (expense), net (0.1 ) (0.3 ) (0.1 ) (0.2 ) Income before provision for income taxes 7.6 7.4 5.1 5.6 Provision for income taxes (2.1 ) (1.6 ) (1.2 ) (1.2 ) Net income 5.5 % 5.8 % 3.9 % 4.4 % Three Months Ended September 30, 2012 versus Three Months Ended September 30, 2011: Net sales by our Business and Consumer lines for the three months ended September 30, 2012 and 2011 were the following: 2012 2011 $ (millions) % of total $ (millions) % of total Net sales: Business $ 111.9 89.6 % $ 111.3 90.1 % Consumer 13.0 10.4 12.2 9.9 % Total net sales $ 124.9 100.0 % $ 123.5 100.0 % 25 -------------------------------------------------------------------------------- Table of Contents Overview Net sales for the third quarter of 2012 were $124.9 million, an increase of 1.1% compared to $123.5 million for the third quarter of 2011. Net income for the third quarter of 2012 was $6.9 million or $0.45 per diluted share compared to $7.1 million or $0.47 per diluted share for the third quarter of 2011.

Consolidated Net sales in our Business lines (subscription broadcasting, OEM, and computing companies) were approximately 90% of net sales in the third quarter of 2012 compared to approximately 90% in the third quarter of 2011. Net sales in our Business lines for the three months ended September 30, 2012 increased by approximately 0.5% to $111.9 million from $111.3 million in the third quarter of 2011. The prolonged sluggish global economy has had an adverse effect on television sales, which, in turn, directly affects our sales to consumer electronics companies. Offsetting the decrease in sales to consumer electronics companies is an increase in net sales within subscription broadcasting. Net sales in subscription broadcasting have remained strong in North America and have grown significantly, on a percentage basis, in Latin America, specifically Brazil.

Net sales in our Consumer lines (One For All® retail, private label, custom installers, and direct import) were approximately 10% of net sales for the third quarter of 2012 compared to approximately 10% for the third quarter of 2011. Net sales in our Consumer lines for the third quarter of 2012 increased by 7% to $13.0 million from $12.2 million during the same period in 2011. International retail sales increased from $11.1 million in the third quarter of 2011 to $11.8 million during the third quarter of 2012 due primarily to increased sales in Latin America. In addition, North American retail sales increased from $0.9 million to $1.2 million.

Gross profit for the third quarter of 2012 was $36.4 million compared to $34.2 million for the third quarter of 2011. Gross profit as a percent of sales increased to 29.2% during the third quarter of 2012 from 27.7 % during the third quarter of 2011. This improvement is due primarily to the long-term, confidential Settlement and License Agreement with Logitech which resulted in a lump-sum payment that was recognized as revenue in the third quarter of 2012 (see Note 10 of the Notes to the Consolidated Financial Statements).

Research and development expenses increased 23.1% from $2.9 million during the third quarter of 2011 to $3.5 million during the third quarter of 2012. The increase is due to additional resources dedicated to general research & development activities in an effort to continue to develop new products and technologies.

Selling, general and administrative ("SG&A") expenses increased 7.0% from $21.9 million during the third quarter of 2011 to $23.4 million during the third quarter of 2012. The weakening of the Euro and Brazilian Real compared to the U.S. Dollar had a favorable effect of $1.0 million on SG&A expenses. Offsetting the favorable currency effect was an increase in bonus expense as well as third party legal expenses due to litigation related to protecting our intellectual property.

Net interest expense was $24 thousand during the third quarter of 2012 compared to $56 thousand during the third quarter of 2011.

Net other expense was $0.1 million during the third quarter of 2012 compared to net other expense of $0.4 million during the third quarter of 2011, which was driven by a lower amount of foreign currency losses.

Income tax expense was $2.6 million during the third quarter of 2012 compared to $2.0 million during the third quarter of 2011. Our effective tax rate was 27.5% for the third quarter of 2012 compared to 21.8% for the third quarter of 2011.

The increase in our effective tax rate is due to a shift of income from lower tax rate jurisdictions to higher tax rate jurisdictions.

Nine months Ended September 30, 2012 versus Nine months Ended September 30, 2011: Net sales by our Business and Consumer lines for the nine months ended September 30, 2012 and 2011 were the following: 2012 2011 $ (millions) % of total $ (millions) % of total Net sales: Business $ 308.1 89.2 % $ 317.7 90.5 % Consumer 37.2 10.8 33.3 9.5 % Total net sales $ 345.3 100.0 % $ 351.0 100.0 % 26 -------------------------------------------------------------------------------- Table of Contents Overview Net sales during the nine months ended September 30, 2012 were $345.3 million, a decrease of 1.6% compared to $351.0 million during the nine months ended September 30, 2011. Net income during the nine months ended September 30, 2012 was $13.6 million or $0.90 per diluted share compared to $15.0 million or $0.98 per diluted share for the nine months ended September 30, 2011.

Consolidated Net sales in our Business lines (subscription broadcasting, OEM, and computing companies) were approximately 89% of net sales during the nine months ended September 30, 2012 compared to approximately 91% during the nine months ended September 30, 2011. Net sales in our Business lines during the nine months ended September 30, 2012 decreased by approximately 3% to $308.1 million from $317.7 million during the nine months ended September 30, 2011. The prolonged sluggish global economy has had an adverse effect on television sales, which, in turn, directly affects our sales to consumer electronics companies. Partially offsetting the decrease in sales to consumer electronics companies is an increase in net sales within subscription broadcasting. Net sales in subscription broadcasting have remained strong in North America and have grown significantly, on a percentage basis, in Latin America, specifically Brazil.

Net sales in our Consumer lines (One For All® retail, private label, custom installers, and direct import) were approximately 11% of net sales during the nine months ended September 30, 2012 compared to approximately 9% during the nine months ended September 30, 2011. Net sales in our Consumer lines during the nine months ended September 30, 2012 increased by 12% to $37.2 million from $33.3 million during the same period in 2011. International retail sales increased from $30.2 million during the nine months ended September 30, 2011 to $33.6 million during the same period of time in 2012 due primarily to increased sales in Latin America. In addition, North American retail sales increased $0.9 million, from $2.6 million to $3.5 million.

Gross profit during the nine months ended September 30, 2012 was $97.7 million compared to $96.7 million during the nine months ended September 30, 2011. Gross profit as a percent of sales increased to 28.3% during the nine months ended September 30, 2012 from 27.6% during the nine months ended September 30, 2011.

This improvement is due primarily to the fact that more units were produced internally versus by third party manufacturers in 2012 compared to 2011. The nine months ended September 2012 was also positively affected by a licensing agreement entered into with a certain customer in the gaming industry as well as the long-term, confidential Settlement and License Agreement entered into with Logitech. Compared to the third quarter of 2011, this favorability was partially offset by pricing pressure from customers.

Research and development expenses increased 12.2% from $9.3 million during the nine months ended September 30, 2011 to $10.4 million during the nine months ended September 30, 2012. The increase is primarily due to additional labor dedicated to general research & development activities in an effort to continue to develop new products and technologies.

Selling, general and administrative ("SG&A") expenses increased 2.8% from $67.1 million during the nine months ended September 30, 2011 to $69.0 million during the nine months ended September 30, 2012. Legal expenses increased by $1.3 million as a result of litigation costs related to protecting our intellectual property. Employee bonus expense increased by $2.5 million. Partially offsetting these increases was a $2.2 million favorable currency effect due to the Euro and Brazilian Real weakening compared to the U.S. Dollar.

Net interest expense was $0.1 million during the nine months ended September 30, 2012 compared to $0.2 million during the nine months ended September 30, 2011.

Net other expense was $0.5 million during the nine months ended September 30, 2012 compared to net other expense of $0.8 million during the nine months ended September 30, 2011, which was driven by a lower amount of foreign currency losses.

Income tax expense was $4.1 million during the nine months ended September 30, 2012 compared to $4.3 million during the nine months ended September 30, 2011.

Our effective tax rate was 22.9% for the nine months ended September 30, 2012 compared to 22.2% the nine months ended September 30, 2011.

27-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Sources and Uses of Cash: Nine months ended Increase/(Decrease) Nine months ended (In thousands) September 30, 2012 in cash September 30, 2011 Net cash provided by operating activities $ 27,644 $ 15,842 $ 11,802 Net cash used for investing activities (7,327 ) 3,627 (10,954 ) Net cash used for financing activities (8,745 ) 15,564 (24,309 ) Effect of exchange rate changes on cash 272 (940 ) 1,212 (In thousands) September 30, 2012 Increase December 31, 2011 Cash and cash equivalents $ 41,216 $ 11,844 $ 29,372 Working capital 109,763 25,002 84,761 Net cash provided by operating activities increased by $15.8 million from $11.8 million during the nine months ended September 30, 2011 to $27.6 million during the nine months ended September 30, 2012. The improvement in cash provided by operating activities is due primarily to a conscious effort to lower our inventory levels in 2012 as evidenced by inventories decreasing by $15.8 million for the nine months ended September 30, 2012 compared to an increase in inventories of $22.2 million in the first nine months of 2011. Partially offsetting this improvement is a decrease in accounts payable and accrued expenses of $8.3 million for the nine months ended September 30, 2012 compared to an increase of $2.5 million for the nine months ended September 30, 2011. In addition, accounts receivable increased by $10.9 million for the nine months ended September 30, 2012 compared to an increase of $2.8 million for the nine months ended September 30, 2011 due to a higher percentage of our sales occurring during the last two months of the quarter ending September 30, 2012.

Net cash used for investing activities decreased by $3.6 million from $11.0 million during the nine months ended September 30, 2011 to $7.3 million during the nine months ended September 30, 2012. Cash outflows to purchase property, plant and equipment were $10.1 million for the nine months ended September 30, 2011 compared to cash outflows of $6.5 million recorded during the nine months ended September 30, 2012. The decrease in property, plant and equipment purchases is due to the completion of the capacity expansion at the Yang Zhou factory during 2011.

Net cash used for financing activities decreased by $15.6 million from cash outflows of $24.3 million during the nine months ended September 30, 2011 to cash outflows of $8.7 million during the nine months ended September 30, 2012.

The decrease in cash used for financing activities was driven in part by a decrease in net debt payments as we reduced our debt balance by $16.6 million during the first nine months of 2011 compared to a reduction of $9.6 million during the first nine months of 2012. In addition, treasury stock repurchases decreased by $8.9 million during the nine months ended September 30, 2012 compared to the same period in 2011.

During the nine months ended September 30, 2012, we repurchased 37,267 shares of our common stock for $0.6 million compared to our repurchase of 441,071 shares of our common stock for $9.5 million during the nine months ended September 30, 2011. We hold repurchased shares as treasury stock and they are available for reissue. Presently, except for using a small number of these treasury shares to compensate our outside board members, we have no plans to distribute these shares. However, we may change these plans if necessary to fulfill our on-going business objectives.

On February 11, 2010, our Board of Directors authorized management to continue repurchasing up to 1,000,000 shares of our issued and outstanding common stock.

Repurchases may be made to manage dilution created by shares issued under our stock incentive plans or whenever we deem a repurchase is a good use of our cash and the price to be paid is at or below a threshold approved by our Board. As of September 30, 2012, we have repurchased 967,357 shares of our common stock under this authorization, leaving 32,643 shares available for repurchase.

On October 26, 2011, our Board of Directors authorized management to repurchase an additional 1,000,000 shares of our issued and outstanding common stock. We have not repurchased any shares under the Board authorization approved on October 26, 2011 as of September 30, 2012.

28-------------------------------------------------------------------------------- Table of Contents Contractual Obligations On September 30, 2012, our contractual obligations were $92.3 million compared to $63.4 million reported in our Annual Report on Form 10-K as of December 31, 2011. The following table summarizes our contractual obligations on September 30, 2012 and the effect these obligations are expected to have on our liquidity and cash flow in future periods.

Payments Due by Period Less than 1-3 4-5 After (In thousands) Total 1 year Years years 5 years Contractual obligations: Capital lease obligations $ 98 $ 20 $ 40 $ 38 $ - Operating lease obligations 13,742 2,208 4,037 3,029 4,468 Purchase obligations(1) 78,448 7,048 31,875 39,525 - Total contractual obligations $ 92,288 $ 9,276 $ 35,952 $ 42,592 $ 4,468 (1) Purchase obligations include contractual payments to purchase tooling assets and inventory.

Liquidity Historically, we have utilized cash provided from operations as our primary source of liquidity, as internally generated cash flows have been sufficient to support our business operations, capital expenditures and discretionary share repurchases. We believe our current cash balances and anticipated cash flow to be generated from operations will be sufficient to cover cash outlays expected for at least the next twelve months; however, because our cash is located in various jurisdictions throughout the world, we may need to borrow from our line of credit until we are able to transfer cash among our various entities.

We are able to supplement this near-term liquidity, if necessary, with our revolving credit line facility. Our liquidity is subject to various risks including the risks discussed under "Item 3. Quantitative and Qualitative Disclosures about Market Risk".

September 30, December 31, (In thousands) 2012 2011 Cash and cash equivalents $ 41,216 $ 29,372 Total debt 6,800 16,400 Available borrowing resources 18,000 18,000 Our cash balances are held in numerous locations throughout the world. The majority of our cash is held outside of the United States and may be repatriated to the United States but, under current law, would be subject to United States federal income taxes, less applicable foreign tax credits. Repatriation of some foreign balances is restricted by local laws. We have not provided for the United States federal tax liability on these amounts for financial statement purposes as this cash is considered indefinitely reinvested outside of the United States. Our intent is to meet our domestic liquidity needs through ongoing cash flows, external borrowings, or both. We utilize a variety of tax planning strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed.

At September 30, 2012, we had approximately $7.7 million, $5.8 million, $21.9 million, $0.6 million and $5.2 million of cash and cash equivalents in the United States, Europe, Asia, Cayman Islands, and South America, respectively. On December 31, 2011, we had approximately $4.1 million, $7.6 million, $16.5 million, $0.1 million, and $1.1 million of cash and cash equivalents in the United States, Europe, Asia, Cayman Islands and South America, respectively. We attempt to mitigate our exposure to liquidity, credit and other relevant risks by placing our cash and cash equivalents with financial institutions we believe are high quality.

At September 30, 2012, we had an outstanding balance of $4.8 million under our U.S. Bank National Association ("U.S. Bank") 1-year term loan facility and $2.0 million under our U.S. Bank revolving credit line.

On October 2, 2012, we entered into an Amended and Restated Credit Agreement ("Amended Credit Agreement") with U.S. Bank. Under the Amended Credit Agreement, the existing secured revolving credit line ("Credit Line") was increased from $20.0 million to $55.0 million and the expiration date was extended from November 1, 2012 to November 1, 2014. The Amended Credit Agreement requires that the Credit Line be used to pay off the remaining outstanding balance of the existing term loan with U.S. Bank National Association. The Credit Line may be used for working capital and other general corporate purposes including acquisitions, share repurchases and capital expenditures.

29-------------------------------------------------------------------------------- Table of Contents All obligations under the Credit Line are secured by substantially all of our U.S. personal property and tangible and intangible assets as well as 65% of our ownership interest in Enson Assets Limited, our wholly-owned subsidiary which controls our manufacturing factories in the People's Republic of China.

Under the Amended Credit Agreement, we may elect to pay interest on the Credit Line based on LIBOR plus an applicable margin (varying from 1.25% to 1.75%) or base rate (based on the prime rate of U.S. Bank National Association or as otherwise specified in the Amended Credit Agreement) plus an applicable margin (varying from -0.25% to +0.25%). The applicable margins are calculated quarterly and vary based on our leverage ratio as set forth in the Amended Credit Agreement. There are no commitment fees or unused line fees under the Amended Credit Agreement.

The Amended Credit Agreement includes financial covenants requiring a minimum fixed charge coverage ratio, a maximum leverage ratio and minimum liquidity levels. In addition, the Amended Credit Agreement also contains other customary affirmative and negative covenants and events of default.

Off Balance Sheet Arrangements We do not participate in any off balance sheet arrangements.

Factors That May Affect Financial Condition and Future Results Forward Looking Statements We caution that the following important factors, among others (including but not limited to factors discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as those discussed in our 2011 Annual Report on Form 10-K, or in our other reports filed from time to time with the Securities and Exchange Commission), may affect our actual results and may contribute to or cause our actual consolidated results to differ materially from those expressed in any of our forward-looking statements. The factors included here are not exhaustive. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor can we assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Therefore, forward-looking statements should not be relied upon as a prediction of actual future results.

While we believe that the forward-looking statements made in this report are based on reasonable assumptions, the actual outcome of such statements is subject to a number of risks and uncertainties, including the failure of our markets to continue growing and expanding in the manner we anticipated; the failure of our customers to grow and expand as we anticipated; the effects of natural or other events beyond our control, including the effects of political unrest, war or terrorist activities may have on us or the economy; the economic environment's effect on us or our customers; the growth of, acceptance of and the demand for our products and technologies in various markets and geographical regions, including cable, satellite, consumer electronics, retail, digital media/technology, CEDIA, and interactive TV industries not materializing or growing as we believed; our inability to add profitable complementary products which are accepted by the marketplace; the need to repatriate our cash resulting in higher than expected costs to use funds; our inability to attract and retain quality workforce at adequate levels in all regions of the world, and particularly Asia; our inability to continue to maintain our operating costs at acceptable levels through our cost containment efforts; our inability to realize tax benefits from various tax projects initiated from time to time; our inability to continue selling our products or licensing our technologies at higher or profitable margins; our inability to obtain orders or maintain our order volume with new and existing customers; the possible dilutive effect our stock incentive programs may have on our earnings per share and stock price; our inability to continue to obtain adequate quantities of component parts or secure adequate factory production capacity on a timely basis; and other factors listed from time to time in our press releases and filings with the Securities and Exchange Commission.

30 -------------------------------------------------------------------------------- Table of Contents

[ LatinAmerica.tmcnet.com's Homepage 's Homepage ]






Technology Marketing Corporation

800 Connecticut Ave, 1st Floor East, Norwalk, CT 06854 USA
Ph: 800-243-6002, 203-852-6800
Fx: 203-866-3326

General comments: tmc@tmcnet.com.
Comments about this site: webmaster@tmcnet.com.

STAY CURRENT YOUR WAY

© 2014 Technology Marketing Corporation. All rights reserved.